business owner SECURE Act 2.0

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With a business to run you may not be paying much attention to retirement plan legislation. Congress is working towards the passage of what has been dubbed the SECURE Act 2.0 and it is packed with potential changes business owners need to know about. Don’t worry, we’ve kept this short and sweet. As a refresher, the original SECURE Act passed in 2019 ushered in the end of the stretch option for required minimum distributions on inherited IRAs and other changes to the retirement plan space. The SECURE Act 2.0 overwhelmingly passed the U.S. House of Representatives 414-5. The U.S. Senate is putting forth their own version of the bill that is expected to pass as well. A version of this bill could be signed into law in 2022.


While there are many proposed changes, this article will focus on 6 proposed provisions most pertinent to business owners:


  • Roth SEP and SIMPLE IRA contributions
  • Increase in the SIMPLE IRA catch-up contribution from $3,000 to $5,000
  • Roth employer match (vs. current pre-tax only)
  • Broader rules for which part-time employees must be covered
  • New plan design requirements for certain businesses (over 10 employees, longer than 3 years in business)
  • Authorizing legislation to allow 401k match to be made on student loan payments


Roth SEP and SIMPLE IRA contributions: previously, business owners were not able to make Roth contributions to a SEP or SIMPLE IRA. The SECURE Act 2.0 has changed this. For some business owners, especially those in the 24% tax bracket or lower with a high income trajectory, the option to make Roth contributions to a SEP IRA or SIMPLE IRA could be an attractive alternative to the traditional pre-tax only contributions. 


Increase in catch-up contributions: In SIMPLE IRA plans the current catch-up contribution is just $3,000. This is in stark comparison to the $6,500 catch-up contribution allowed to plan participants over age 50 in 401k plans.


Roth employer match: Business owners that run 401(k) plans on behalf of their teams would now be able to make their employer contributions to Roth accounts. Currently, even employees who make Roth 401(k) contributions must receive their employer contributions in a pre-tax account. 


This change would allow employers to contribute directly to a Roth account. While this would be an employee election, the employer/plan sponsor would have to allow it to be offered as an option in the first place.


Part-time employees: the proposed SECURE Act 2.0 law would require employers to include part-time employees who work 500 hours/year for 2 years to be allowed to enter into the 401(k) plan. This is a reduction to the current provision requiring 3 years of service. 


Realistically, it may naturally be in a business owner’s best interest to retain long-standing part-time talent as the cost of hiring and training is not insignificant. 


New plan design requirements: plans may be required to default to an auto enrollment at 3% of an employee’s pay. An auto-escalation feature would also be introduced. It would increase the employee’s contribution percentage by 1% each year until they hit at least 10% of their pay (max auto-escalation feature we’ve read was up to 15% of pay). This would apply to new 401(k) plans offered post legislation for employers who have been in business for at least 3 years and have at least 10 employees. These provisions would not apply to church or government plans. 


There may also be provisions for a $1,000 tax credit per covered employee for business owners offering a retirement plan. In a gift to insurance companies, the proposed bill would also allow certain lifetime annuities to be included as an investment option for employer retirement plans. 


Spark continues to monitor the proposed law and will alert our business owner clients to any changes they may need to address within their own retirement plans. If you have any questions about how these proposed changes may affect your personal path to financial independence, give us a call. We’re happy to discuss it with you.

Book a 15 minute phone call with Spark 

Wondering how the proposed SECURE Act 2.0 might impact you on a personal level? We’ve got you covered:

Round Two: The Proposed SECURE Act 2.0

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